Personal Finance

Retirement

Four Costly but Easily Avoidable Mistakes

Friday August 21, 2009

Are you reviewing your beneficiaries regularly? Is your home underinsured? Do you understand the advantages and disadvantages of joint ownership? By the time you realize your mistake, it's usually too late to correct it.

The 2013 Retirement Confidence Survey® performed by the Employee Benefit Research Institute showed that only 13 percent of the population is very confident that they have enough money for a financially secure retirement. Be sure that what you can control doesn’t penalize your retirement. Below are four mistakes that are easy for you to control and avoid.

Naming the wrong insurance beneficiary

Life insurance has many benefits. Among them is the fact that death benefits are generally paid directly to the beneficiary you name in the policy without passing through probate. But what happens if the beneficiary you name is unable to accept the death benefit because he or she is a minor, deceased or incompetent? In these circumstances, unless you've named an alternate beneficiary, the life insurance proceeds will be subject to all of the expenses and delays associated with settling an estate through probate.

What can you do before it's too late? Review your life insurance beneficiary designations at least annually to be sure the proceeds will pass to the proper beneficiary without the involvement of probate. Also, consider adding at least one contingent or alternate beneficiary in case the primary beneficiary is unable to receive the proceeds.

Ownership of assets

Owning assets jointly often can be a good strategy to avoid probate or minimize estate taxes. However, this form of asset ownership also has disadvantages. The joint owner has equal rights to the jointly owned asset, meaning he or she can withdraw from a joint bank or brokerage account or sell his or her interest in the asset without your consent. In addition, adding someone's name to an asset may be considered a gift, subject to possible gift taxes. And owning assets jointly exposes those assets to the creditors of your joint owner. Finally, with respect to long-term care planning and Medicaid qualification, adding a joint owner can negatively affect your Medicaid eligibility.

What can you do before it's too late? Consider the ramifications of joint ownership carefully before implementing this strategy and get professional advice. If your intent is to leave the asset to the joint owner, alternatives such as payable-on-death accounts, trust designations or life estates may accomplish your goal and protect your interest in the asset at the same time.

Underinsuring your home

Most of us assume our insurance will cover the replacement cost of rebuilding our homes in case of total loss from fire or other damage. When you get an estimate you could discover they are not going to cover the entire cost to rebuild. The policy may only provide extended replacement cost, which offers up to 120 percent of the policy's face amount — not enough to cover all of the costs to rebuild your home.

What can you do before it's too late? Review your policy at least annually and make sure the face amount is enough to cover the cost to rebuild your home. That means you need to know the approximate cost to rebuild, including any additions and improvements you made to the home. Also, take into consideration increasing costs of materials and labor.

Selecting the wrong pension option

If you have an employer-sponsored pension for your retirement, the distribution choices you make usually can't be changed, regardless of whether your circumstances change. Before making your choice, get all of your plan's options from the plan administrator and review them with a financial professional who can help you crunch the numbers. Estimate your retirement income needs, then determine what the best strategy is for you and your family.

What can you do before it's too late? If you're married, you're required to take a joint and survivor option, unless your spouse waives his or her rights to your pension. If you elect the single life option, your payments will be larger but at the expense of any future spousal benefit. If you choose the single life option, make sure you have plenty of other income or life insurance to replace the pension for your surviving spouse.